Anti-poverty advocates look to promote — and protect — new tax credit for working poor

As tax season arrives, advocates for the Connecticut’s new income tax credit for working poor families are trying to keep commercial tax preparers — and revenue-hungry state officials — from getting their hands on it.

The Connecticut Association for Human Services, one of the private, nonprofit community’s leading anti-poverty organizations, is coordinating an outreach campaign to steer needy households to free tax preparation services also run by nonprofits.

The alternative for families lured by ads promising “free tax returns” at commercial tax preparation firms could be tens or even hundreds of dollars sapped from their state income tax refund.

“We want to make sure everybody who’s eligible for the Earned Income Tax Credit knows about it, and we want to make sure they get to keep all of it,” Jim Horan, executive director of CAHS, said Monday.

Some commercial tax preparation businesses promote “free” returns, but that actually only applies to a standard form. Any additional tax schedule, such as one needed to claim an earned income tax credit, can cost more.

The association manages a referral list of more than 40 nonprofits that provide free tax preparation services for families with annual incomes below $50,000, which would cover all EITC-eligible households, Horan said. The Infoline service run by the United Way of Connecticut, which can be accessed by dialing 2-1-1, also can refer poor families to free tax preparation services.

About 190,000 Connecticut households claimed the federal EITC in 2010, and the association is projecting that more than 200,000 households will be eligible to claim both a federal and state credit on their 2011 tax returns.

Horan said there are two groups in particular the association’s outreach program is trying to target:

The approximately 30,000 Connecticut households who claimed a federal EITC last year and did not file a state income tax return;

And, the about 20 percent of all households nationally who were eligible for a federal EITC but who failed to claim them, according to the IRS. Horan said this group also would likely fail to claim a state credit, unless outreach efforts succeed.

“We would definitely want to reach all of those people,” Horan said. “This is the single-biggest public policy that pulls people out of poverty, amd it does it by encouraging people to work.”

The average federal EITC claimed by Connecticut families over the past three years is about $1,800. Based on that number, the average state EITC — had it existed during that time — would have been $540.

Technically families earning up to $49,000 per year can qualify for a federal Earned Income Tax Credit, depending on the number of children they have. But most EITC recipients earn less than $20,000.

The General Assembly and Gov. Dannel P. Malloy established a state credit last May. Effective in the 2011 tax year, the state credit is available to households eligible for the federal EITC, and is equal to 30 percent of the value of the federal credit.

Nonpartisan legislative analysts estimated the state program will return $110 million to Connecticut households.

And though its primary purpose is to help poor families increase their savings, it also has a strong economic stimulus component, said Liz Dupont-Diehl, policy director for CAHS.

“Every study shows that a very large percentage of the EITC is immediately re-invested in the community,” Dupont-Diehl said, noting that what recipient households can’t afford to save typically is spent on groceries, clothing or other basic needs.

With Connecticut’s economy continuing to recover slowly from the recession, the state EITC also can help those middle-income households on the verge of slipping into poverty because of pay reductions or one spouse losing a job. “The EITC is an effective (financial) base-builder helping families move onward and upward,” she said.

Anti-poverty advocates also are closely watching the upcoming legislative session, which begins Feb. 8, to ensure that the new state EITC is not scaled back to help patch holes in state finances.

The legislature’s nonpartisan Office of Fiscal Analysis reported last week that this year’s $20.14 billion budget is $145 million in deficit, even though the Malloy administration insists it still is on pace to finish a razor-thin $1.4 million in the black.

A built-in fiscal cushion of nearly $500 million in the preliminary budget for 2012-13 has been whittled in half in recent months as a result of declining state tax revenue projections. And that was before Malloy unveiled a new plan to dramatically boost spending on contributions to the cash-starved state employee pension fund — an initiative that would call for an extra $123.4 million to be spent starting next fiscal year.

And the new state EITC has been in the fiscal cross-hairs before.

The Malloy administration offered a proposal last June — just one month after the EITC’s enactment — to reduce the credit by one-sixth after unionized state employees initially rejected a major concessions package. The concessions were approved during a second vote in late August and the reduction in the EITC was canceled.

Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, said Monday, “I don’t want to put anything on or off the table right now, but I think that (reducing the EITC) would fall under our general aversion to any further tax increases.”

Horan added that he also is optimistic that the governor and legislature won’t scale back the new anti-poverty program.

“This wouldn’t have happened without Governor Malloy,” he said, noting that it was established last year while the administration and legislature were dealing with an unprecedented $3.67 billion deficit projection for the 2011-12 fiscal year.

“The fact that it happened while facing that kind of deficit is fantastic. I think they really see the merit in this credit,” Horan said.